How to Detect Investment Fraud

How to Detect Investment Fraud

I am on an email list for the State Board of Securities. They send out emails about investment advisors that they have caught in investment scams. Unfortunately, these come out on a regular basis. There is a lot of fraud occurring. What’s worse, these fraudsters advertise on credible mediums such as the radio as well as websites. This leads investors to believe that they must be credible. After all, what investment advisor is dumb enough to advertise a fraudulent scheme right out in the open for regulators to see? You might be surprised! This is happening. The bottom line is that there is a lot of fraud occurring and I want to make sure that you don’t end up being a victim.  

Fraudulent investment selling is not hard to spot. They have 4 characteristics.

First, they could be asking you to write the check directly to the investment advisors firm or the investment advisor.  (All the same thing!) In legitimate investment scenarios, checks and balances exist and the investment advisor never has access to client money. There are walls of separation. First, there is the investment advisory firm. Then there is the broker dealer that monitors the investment advisor.  Finally, there is the clearing house which handles the money. To be fair, there can be legit situations where the check is written to the firm and it could be within the bounds of security laws. Regulators are discouraging that type of arrangements so you see less and less of it.  Plain and simple – an investment advisor that asks you for a check made out to any type of an account where there is ownership is a huge red flag.

 Second, is the advisor licensed?  This is a easy clue to investigate. The majority of time these fraudsters aren’t even licensed to sell investments.  You can actually go online and check the investment advisors registrations. Go to look up the investment advisor.  

Third, is the security that is being offered a registered investment?  The vast majority of cases of fraud include unregistered securities. Basically, you have unregistered advisors selling unregistered investments.

Fourth, are the benefits and claims almost too good to be true?  Oftentimes, they will include high guaranteed returns. There is a litmus test you can run. If it is a guaranteed rate of return they are promising, compare it to the going rate. If there is a big gap, then something is not right.  For example, let’s say that CD’s are paying 1.5% and fixed annuities are paying a maximum of 3%. The investment scam is offering a guaranteed rate of 9%. The gap between 9% and the going rate would signal that something is not right and potentially be a scam.

Years ago, I had someone call me wanting to know what I thought about a guaranteed CD that was paying 7%.  Knowing that the going rate was 3%, I warned the caller that this could be a scam. The individual went ahead and placed the money with the bank. They ended up losing $250,000 because it was indeed a scam.

We live in a day and time where you don’t have the luxury of being so trusting. Do your due diligence and you will prevent yourself from being another investor who has been scammed.  


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